In his August 15, 2025 address from the Red Fort, Prime Minister Narendra Modi said the government would roll out “next-generation” GST reforms by Diwali 2025, with a focus on reducing taxes on daily-use items and easing compliance for MSMEs. The specifics will be drawn up through the GST Council, the constitutional body of the Union and states that sets rates and rules.
The Group of Ministers (GoM) on GST rate rationalisation, which was set up in 2024 and is composed of state representatives, has now accepted the Union government’s proposals and recommended them to the Council. The Council will meet on September 3–4 to deliberate. If adopted, the shift would leave the vast majority of goods concentrated in just two slabs, 5 per cent and 18 per cent.
Currently, GST is split across seven slabs: 0.25 per cent, 3 per cent, 5 per cent, 12 per cent, 18 per cent, 28 per cent, and a compensation cess levied on items in the highest bracket. Under the Union government’s plan, this would shrink to just four: a special rate of less than 1 per cent for jewellery, diamonds and precious metals; 5 per cent; 18 per cent; and a new 40 per cent rate for “sin” goods such as tobacco, alcohol, and cigarettes.
Impact on government revenue and state finances
Economists estimate the proposed GST rate overhaul could cut revenues by ₹1.1–1.8 trillion annually, a burden to be split between the Centre and states. The Union government is better placed to absorb its share, especially after receiving a record ₹2.69 trillion RBI dividend in FY25, though such transfers are not guaranteed every year.
However, for states, the picture is less comfortable. The five-year compensation guarantee ended in June 2022, leaving no automatic cushion. Kerala Finance Minister K N Balagopal, part of the Group of Ministers, has urged the Council to devise a new support mechanism if losses mount. At present, the compensation cess continues only to service past borrowings and will run until March 2026.
Average gross GST collections in FY25 were about ₹1.84 trillion a month, according to the Finance Ministry’s eight-year review. With SBI economists projecting the effective GST rate could drop to 9.5 per cent by 2026–27 (from 14.4 per cent in 2017 and 11.6 per cent in 2019), sustaining revenue will depend heavily on widening the base, tightening compliance and limiting evasion.
How GST came into effect in India
The Goods and Services Tax mechanism was established through the 101st Constitutional Amendment (2016), which created the GST Council under Article 279A and introduced a destination-based tax system. Following ratification by Parliament and a majority of state Assemblies, GST was implemented on July 1, 2017.
The reform subsumed all but a few central and state indirect taxes into a dual structure: CGST (central), SGST (state), and IGST (for inter-state commerce), jointly administered. To ease the transition, Parliament enacted a five-year compensation law guaranteeing states a revenue growth of 14 per cent annually, starting with 2015–16 as the base year.
The rationale behind launching GST
The idea traces back at least to the Kelkar Task Force (2005) and the Chief Economic Adviser’s Revenue Neutral Rate (RNR) Committee (2015). Both recommended unifying the myriad indirect taxes to eliminate cascading effects, simplify compliance, and create a single national market.
The Kelkar Task Force laid the foundation for subsequent reforms, while the CEA panel pegged the revenue-neutral rate at around 15–15.5 per cent, suggesting a standard rate in the 17–18 per cent band. These benchmarks shaped early Council debates and reflected the goals of tax efficiency, fairness, and digital compliance.
How GST replaced India’s patchwork tax system
Before GST, goods and services were taxed under a patchwork of central excise, service tax, VAT, entry tax, luxury tax, and multiple cesses, often compounding at different stages. GST replaced these with a single destination-based tax and a seamless input credit chain, extending from manufacturer to retailer.
The GST Council also rolled out common return filing systems, e-way bills, and e-invoicing to unify state procedures. However, key items like petroleum and alcohol for human consumption were left out of GST’s scope and remain subject to legacy taxes.
Initial winners and losers post-GST rollout
When GST was launched in July 2017, most services shifted from a 15 per cent service tax to an 18 per cent GST rate, raising costs for telecom, insurance and banking. But subsequent Council meetings—particularly in November 2017—reduced rates on over 200 items. FMCG products like soaps, shampoos, and detergents dropped from 28 per cent to 18 per cent, while restaurants largely moved to 5 per cent without input credit.
The broad direction was to reduce tax burdens on mass-consumption goods while retaining luxury and sin goods in the highest bracket. The upcoming Diwali package is expected to continue this trajectory, though the exact consumer impact will hinge on the final list of affected goods.
GST rate structures across the world
Globally, GST or VAT models vary widely. New Zealand operates a flat 15 per cent GST with minimal exemptions. Singapore uses a single 9 per cent rate. Australia’s 10 per cent GST exempts basic items like fresh food and education.
Canada has a layered approach: a 5 per cent federal GST plus provincial HST or PST depending on the province. European Union countries typically follow a VAT model with a 20 per cent standard rate and reduced rates for essentials. India’s multi-slab system reflects its federal structure and the need for distributive equity.
Challenges faced in GST implementation
India’s initial GST rollout faced hurdles like tech glitches, invoice mismatches, and IGST settlement errors. The CAG’s audit of FY18 flagged these issues. Over time, return systems were simplified and analytics enhanced to improve compliance.
However, businesses still cite frequent rate changes, classification disputes, and refund delays as pain points. Petroleum remains outside GST, perpetuating cascading taxes in transport-heavy industries. As the Council preps for Diwali reforms, stakeholders hope for a smoother execution this time.
What the new reforms mean for households
If the rationalisation is approved, it could substantially reduce household costs. Toiletries like soaps, toothpaste, and shampoos would move from 18 per cent to 5 per cent. Essential items like tea, sugar, spices, lifesaving drugs, and low-cost garments would remain in the 5 per cent slab. White goods like air-conditioners and refrigerators would drop from 28 per cent to 18 per cent.
Economists expect these shifts, alongside fewer slabs, to reduce average tax burdens and simplify billing. The actual consumer benefit, however, will depend on how effectively businesses pass on the savings.
Open questions ahead of the Council’s September meet
Despite the promise of relief, clarity is awaited on critical details. What qualifies as “daily-use”? When will the changes take effect? How will anti-profiteering rules be enforced?
States are likely to demand revenue safeguards. Exporters and MSMEs may face short-term liquidity stress during transitions. Petroleum’s exclusion remains a structural gap. For the 2025 GST reforms to succeed, the Council’s decisions and follow-through will be crucial.
